Policy Uncertainty, Bad News Disclosure, and Stock Price Crash Risk

51 Pages Posted: 29 Jan 2021 Last revised: 8 Mar 2021

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Kevin Tseng

National Taiwan University - Department of Finance; National Taiwan University - Center for Research in Econometric Theory and Applications

Jundong (Jeff) Wang

San Diego State University - Accountancy

Yaoyi Xi

San Diego State University

Date Written: December 8, 2020

Abstract

This paper documents that policy uncertainty reduces future stock price crash risk. Our tests show that this negative relation is more pronounced among firms with more short-sale constraints, with no actively traded credit default swap contracts, or with higher firm-level political risks. The results from regressions adopting the instrumental variable approach and from a quasi-natural experiment suggest that the negative relation observed between policy uncertainty and stock price crash risk is unlikely to be driven by potential endogeneity. Additional tests show that this negative association is driven by firms’ decreased hoarding of bad news during periods of high policy uncertainty.

Keywords: economic policy uncertainty, stock price crash risk, accounting, disclosure, litigation risk, bad news hoarding

JEL Classification: G30, G38, M40, M48

Suggested Citation

Kim, Jeong-Bon and Tseng, Kevin and Wang, Jundong (Jeff) and Xi, Yaoyi, Policy Uncertainty, Bad News Disclosure, and Stock Price Crash Risk (December 8, 2020). Available at SSRN: https://ssrn.com/abstract=3745260 or http://dx.doi.org/10.2139/ssrn.3745260

Jeong-Bon Kim (Contact Author)

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Kevin Tseng

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

National Taiwan University - Center for Research in Econometric Theory and Applications ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

Jundong (Jeff) Wang

San Diego State University - Accountancy ( email )

United States

Yaoyi Xi

San Diego State University ( email )

San Diego, CA 92182-0763
United States

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